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Proximity to Power

gerhard011509.jpgToday’s news that TNK-BP has appointed the former chancellor of Germany, Gerhard Schröder, to its board of directors is a striking illustration of just how far away Russia has fallen from the most basic standards of a functioning market.  What matters in this business environment is not efficiency nor competitive, commercial success, but rather proximity to power, whereby business survival depends on personal relationships with the political apparatus, and backroom handshakes of preferential status are necessary to overcome problems.  It is a process of creeping corporate acquiescence to the corruption of state officials, and the final resignation to the fact that Russia is not a rule of law state in which the law is dependable to protect one’s property.

TNK-BP’s motivation behind this decision is clear.  The Anglo-Russian joint venture, 50% held by the British and 50% held by the AAR consortium (Alfa Bank, Access Industries, and Renova, bringing the weight of the two powerful oligarchs Mikhail Fridman and Viktor Vekselberg), experienced an absolutely awful year in 2008 as the two sides underwent an epic struggle for control of the company.  The BP side had certain views on the strategic development of the company, seeking to reinvest dividends into maximizing production (which requires the hiring of expensive technical experts and secondees).  In a compelling letter to FT, Mikhail Fridman outlined the Russian perspective, which accused the British of treating TNK-BP as “a vehicle for adding reserves to shore up its own stock price” while preventing the venture from expansion beyond Russia.  There was no love lost over at BP, whose Chairman Peter Sutherland put it quite bluntly:  “This is just a return to the corporate raiding activities that were prevalent in Russia in the 1990s.”

We could spend all evening exploring the ins and outs of the dispute as it quickly spun out of control, with the repeated office raids, arrests of alleged corporate spies, regulatory and tax harassment, subpeonas and FSB interrogations, and finally, the toppling of Chief Executive Robert Dudley.  The state has played an enormous role in the dispute, instrumentalized by the Russian side to pile on the leverage, rumored to nationalize a stake to end the dispute, and pandered to by the foreign investors (Tony Hayward held a meeting with Igor Sechin to request intervention, but failed to yield results).

But will the hiring of Gerhard Schröder, who is paid $390,000 a year by Gazprom to push the Nord Stream pipeline project, help to put an end to all of TNK-BP’s issues with the government? We have posted copious material on this blog regarding Schröder’s conduct vis-à-vis Russia over the years, which has come under significant criticism both at home and abroad.  There is little doubt that he maintains one of the closest relationships with Vladimir Putin in Europe outside of Silvio Berlusconi, and that this preferential status is often paid out in political support for whatever action Russia may take, whether it is defending the last round of elections, the invasion of Georgia, and the energy cut-off to Ukraine.

Does this mean that we can expect to see BP begin to lend its high level access to the British government to the Kremlin, and similarly follow the Schröder line in supporting Russian energy initiatives, sometimes at the expense of European consumers?  There is little possibility for us to predict what kind of quid pro quo will be negotiated, but what we do know is that the hiring of Schröder represents a big step in that direction.  However, the entrance of the former German chancellor into TNK-BP in no way alleviates the serious problems that the British side continues to have with the Russians, and if anything, it is hard to imagine Schröder outgunning both Fridman and Vekselberg in terms of trafficking Kremlin influence … the AAR group has been consistently underestimated, and shown itself adaptive and powerful beyond expectations.  If anything, TNK-BP can probably count a little less direct harassment by the government, but is unlikely to recoup any of the lost ground or succeed in appointing their preferred candidate for CEO.

In broadstroke, there are some important lessons here, and a disappointing trend.  Businesses and corporations investing in emerging markets need to begin showing a greater level of support for the development of rule of law and the strengthening of institutions to solve disputes.  Capitulation to the corruption of state officials to interfere in the private sector helps to create a self-perpetuating cycle – undoubtedly it takes two to tango.  The long-term success of BP’s joint venture in Russia, which is critically important to their bottom line, will depend much more on Russia’s ability to reverse its course and make progress in eliminating legal nihilism while creating transparency.  Until companies like TNK-BP can rely upon the legal process within Russia to settle its corporate disputes, solutions such as hiring a board member only because of his proximity to the powers are temporary fixes – just a band aid instead of intensive surgery.

Photo: Former German Chancellor Gerhard Schroeder (L) and Vladimir Kotenev, Russian Ambassador to Germany attend the opening of the “Industry Day Russia” at the Albrechtsberg Palace in the eastern German city of Dresden on September 16, 2008. (AFP/Getty Images)